[OPE-L:6161] Re: oil rent

From: Patrick L. Mason (pmason@garnet.acns.fsu.edu)
Date: Tue Nov 06 2001 - 10:02:44 EST


I follow the application of the theory of differential rent to the 
international price of oil.

There are however three caveats. First, I think the theory has to be 
applied to "oil sites" (possibly, firms) and not to regions. For example, 
when the price of oil tumbled severely in the late 1980s after the Saudis 
flooded the international market with oil (because they were angry at 
cartel members who would not uphold cartel agreements) many wells in the US 
were permanently closed. Many however remained opened. Large firms, like 
Exxon, will have many high and low cost sites. So, the appropriate unit of 
analysis is the marginal oil field - not the nation, region, or even firm. 
Marx applied his theory of differential rent to the marginal acre of land, 
where the aggregate level of consumption determined the total amount of 
required agricultural product.

Second, the OPEC members have different time horizons - even as many may 
have similar low costs of extraction. The Saudis have a great deal of oil 
and do not wish to have a regime of high prices, as this would cause a 
speed up in the use of oil substitutes and thus diminish the value of their 
overall stock. Other OPEC members have much less oil and thus would like a 
regime of very high prices, since substitution away from oil is not a 
viable solution in the short and they will not have any oil in the long run.

Three, the issue of political stability. Those countries with highly 
unstable elites might wish to have very high prices for two reasons. One, 
it generates the high profits necessary to buy off internal opposition. 
Two, they'd looked down the road and discovered that they, i.e., the oil 
barons, will not be in power much longer; hence, they wish to sell all the 
oil they can now and profits in US treasury bonds.

On a related issue, I am confused at how you related this to the Bin 
Laden's Pan-Islamic agenda. (My words here, not yours). Paraphrasing, you 
said that US oil companies were getting the best of the Saudis. I gather 
that other than religious issues, radical nationalists in Saudi are also 
upset with US control. Please expand on this for me.

peace, patrick l mason

At 08:44 PM 11/5/01 -0800, you wrote:
>forwarded from left business observer list
>From: "Cyrus Bina" <binac@mrs.umn.edu>
>To: "Doug Henwood" <dhenwood@panix.com>
>Date: Mon, 5 Nov 2001 15:32:27 -0600
>The notion of globalization of the oil industry rests on the following
>1. The mechanism or the formation of DIFFERENTIAL PRODUCTIVITY (reflecting
>differential profitability) of oil production globally. This reflects the
>competition of all oil regions (low cost as well as high cost) around the
>world. However, in order for the high cost regions (i.e., the US oil) to
>remain in production at all, market price of oil must accommodate their
>costs plus normal profit.
>2. All the low and lower cost oil regions, given the global market price,
>would obtain a portion of surplus value as differential oil rents. The
>magnitude oil rent associated with each lower cost region depends upon the
>difference between their individual cost and global market price. Thus the
>lowest cost regions (i.e., Middle East) obtain larger magnitude of oil
>rents. If for some reason the global price of oil falls to say, 50 percent
>its actual magnitude, in a sustained period of time, then oil from some of
>the highest cost region would be shut down and, at the 50 percent global
>price, the lower cost (than the US, etc.) will make little or no rent. It
>is in this connection that Oil rent is price-determined. Once the price is
>determined by the market, the magnitudes of differential oil rents will
>I hope this will be helpful.

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